India Markets Weekahead: Pre-budget rally may be muted

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The Nifty touched a new high of 7,700 before cracking on Friday to slip about 0.5 percent for the week. This was primarily triggered by the unrest in Iraq and the subsequent rise in crude prices.

The markets were also overbought aided by a relentless rally since May 9‎, with the CNX Nifty climbing about 16 percent, S&P BSE Midcap Index rising 26 percent and the S&P BSE Small cap index jumping 35 percent. The last one-month saw 115 multi-baggers with 92 percent of traded stocks gaining during the period. The probability of picking a loser was minimal. It seemed making money had never been so easy.

Important macro data such as IIP and CPI were announced during the week. Though IIP for April witnessed a 13-month high of 3.4 percent, the low base effect was a possible reason for the muted reaction. Inflation too was benign, dropping to 8.28 percent. The trade deficit continued to disappoint, widening to $11.2 billion though exports grew to a six-month high at $27.9 billion.

The rupee also witnessed a continued decline ending the week at 59.68 against the dollar. Two-wheeler and car sales for May saw a healthy upsurge of 11.71 percent and 3.08 percent after a long slowdown but most of the stocks had already outperformed based on an expected turnaround in buyer sentiment.

Rebels in Iraq have been advancing towards Baghdad, raising concerns about oil production in the world’s second largest exporter. Brent hit a high of $114.07. Fear of militancy and sectarian violence spreading will keep oil prices under pressure. The Ukraine crisis also seems to be escalating.

In India, Prime Minister Narendra Modi said that the country will have to brace for some “tough economic decisions” to improve its financial health. This could be an indication of fiscal prudence in the budget as the financial health of the economy may not give much room to the finance minister to provide tax sops as widely expected.

The hike in urea prices was implemented after a four-year gap to reduce the ballooning fertilizer subsidy. One needs to see how the farming community reacts to this especially when the monsoon forecasts are indicating below-average rains. The squeeze could affect rural consumption. It’s also clear that measures taken for long-term benefits may not be easily digestible in the short term.

Meanwhile, Vishal Sikka was appointed the new CEO at Infosys, ending months of speculation. Though the stock has corrected sharply, except for a marginal bounceback last week, the upgrades will await Sikka’s concrete road map.

The first installment of advance tax would be an indication of corporate performance for the coming year. The FOMC monetary review will have a bearing on international markets unless it is overshadowed by developments in Iraq. Markets would look for latest projections for growth and unemployment, and more importantly, indicative timelines for raising of interest rates.

Over-exuberance in recent weeks has pushed the markets beyond fundamentals with Nifty Price-Earning touching 21x. After the initial honeymoon, the Modi government would now get into implementation mode when it would have to take tough decisions as indicated by the prime minister. The developments in Iraq and Ukraine are a matter of concern and may not augur well for short-term market sentiment.

With a clear long-term vision from the government, the markets could be in a multi-year bull market but corrections in between could be sharp and swift. These would be the opportunities to exit the underdogs which have performed and to switch to fundamentally good stocks. Although the Nifty has good support around 7,200, the pre-budget rally may be muted based on the re-calibration of expectation‎s.

Author Profile

Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.